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Finnish mobile phone maker Nokia this morning announced that it has lowered its first-quarter 2012 outlook for the key Devices & Services business unit, despite selling over 2 million Lumia phones in the first quarter of the year.

It said multiple factors negatively affected the unit ‘to a greater extent than it previously expected’. In particular, Nokia blamed declines in gross margins and ‘competitive industry dynamics’ (which means Apple and Android handset makers are continuing to making the company’s life difficult).

This isn’t going to make Nokia the most valuable company in Finland again, we reckon.

Stephen Elop, President and CEO of Nokia, called the financial results for Q1 2012 ‘disappointing’ but added that Nokia will be increasing its investments in Lumia:

“Our disappointing Devices & Services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our Devices & Services business continues to be in the midst of transition.

Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success. Our operator and distributor partners are providing solid support for Windows Phone as a third ecosystem, as evidenced most recently by the launch of the Lumia 900 by AT&T in the United States.”

Nokia currently estimates that net sales for its Devices & Services unit in the first quarter of this year were 4.2 billion euros, and estimates gross margin to come in at approximately 25 percent across the board, with the Smart Devices division’s gross margin at approximately 16 percent.

In the first quarter 2012, Nokia says it sold more than 2 million Lumia devices at an average selling price of approximately 220 euros.

The company asserts that it has seen sequential growth in Lumia device activations every month since starting sales of handsets in November 2011.

Nokia currently estimates that its non-IFRS Devices & Services operating margin in the first quarter 2012 was approximately negative 3 percent instead of break-even or slightly positive, and expects similar or worse results in the second quarter of 2012. Nokia will report its Q1 2012 results on April 19.

The company says it aims to fix things by increasing its focus on accelerating Lumia sales as well as planned cost reductions. Nokia says it will also pursue additional ‘significant structural actions’ if and when it deems necessary (which we daresay means more layoffs down the line).

The announcement comes on a day the company unveiled its first NFC Windows Phone handset, the Lumia 610 NFC, to the world.

The impact of these factors on the non-IFRS Devices & Services operating margin in the first quarter 2012 was partially offset by a significant benefit from lower warranty costs.

Updated outlook for Devices & Services for the first quarter 2012:

Nokia currently estimates that its non-IFRS Devices & Services operating margin in the first quarter 2012 was approximately negative 3 percent, compared to the previously expected range of “around breakeven, ranging either above or below by approximately 2 percentage points” primarily due to the factors noted above.

Outlook for Devices & Services for the second quarter 2012:

Nokia expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be similar to or below the first quarter 2012 level. This outlook reflects that the first quarter 2012 benefit related to lower warranty costs is expected to be non-recurring, as well as expectations regarding a number of factors including:

“Our disappointing Devices & Services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our Devices & Services business continues to be in the midst of transition,” said Stephen Elop, President and CEO of Nokia. “Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success. Our operator and distributor partners are providing solid support for Windows Phone as a third ecosystem, as evidenced most recently by the launch of the Lumia 900 by AT&T in the United States.”

Additional commentary on the first quarter 2012 for Devices & Services and Nokia:

Based on the preliminary view, Nokia ended the first quarter 2012 around the high end of our normal 4 to 6 week channel inventory range, but on an absolute unit basis, channel inventories declined sequentially.

Nokia currently estimates that Devices & Services gross margin (including Devices & Services Other) for the first quarter 2012 was approximately 25%, with Mobile Phones gross margin of approximately 26% and Smart Devices gross margin of approximately 16%.
In the first quarter 2012, Nokia sold more than 2 million Lumia devices at an average selling price of approximately EUR 220 (reported within the Smart Devices business unit).

Furthermore, Nokia has seen sequential growth in Lumia device activations every month since starting sales of Lumia devices in November 2011. Lumia has gained market share with both distribution partners and consumers. The Windows Phone ecosystem is also attracting developers and has expanded rapidly with more than 80,000 applications available.

Nokia currently estimates that at the end of the first quarter 2012, the company’s gross cash and other liquid assets were approximately EUR 9.8 billion, and Nokia’s net cash and other liquid assets were approximately EUR 4.9 billion. The sequential decline in net cash and other liquid assets was driven by Devices & Services, which experienced unfavorable and mostly non-recurring net working capital changes as well as operating losses.

Nokia Siemens Networks contributed positively to Nokia’s cash flow in the first quarter 2012 due to net working capital improvements. This was despite Nokia Siemens Networks having a preliminarily estimated non-IFRS operating margin of approximately negative 5 percent in the first quarter 2012, in line with the previously provided outlook.

Nokia is quickly taking action. Nokia will continue to increase its focus on accelerating Lumia sales, as well as on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.

– In the Smart Devices business unit, Nokia is increasing investments in Lumia to bring more products to more consumers in more markets.
– In the Mobile Phones business unit, Nokia is taking tactical pricing actions in the near term and plans to bring new products to market in the second quarter 2012.
– Nokia will accelerate planned cost reductions and will pursue additional significant structural actions if and when necessary.

“We are continuing to increase the clock speed of the company,” said Stephen Elop, President and CEO of Nokia. “The change is tangible, and we are proud of the way Nokia employees are quickly responding to the needs of consumers and partners.”

Nokia will provide full first quarter results and more details when it reports its first quarter 2012 results on April 19, 2012.